Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Increased Fiscal Spending Could Spell Debt Trouble for 2017

Interest-Rates / US Debt Jan 04, 2017 - 11:58 AM GMT

By: John_Mauldin

Interest-Rates

Over the past 30 years, America’s economic growth and boom-bust market cycles have been fueled with abundant sources of cheap debt. Whether emerging markets or commodity-rich countries, there’s been no shortage of buyers of US debt.

This has allowed the US—and by extension its consumers—to borrow huge sums of capital to spend on fiscal items or for personal consumption. It was a rather symbiotic relationship from which both parties would benefit, even if longer term prosperity was being jeopardized.


Over the past 30 years, America’s economic growth and boom-bust market cycles have been fueled with abundant sources of cheap debt. Whether emerging markets or commodity-rich countries, there’s been no shortage of buyers of US debt.

This has allowed the US—and by extension its consumers—to borrow huge sums of capital to spend on fiscal items or for personal consumption. It was a rather symbiotic relationship from which both parties would benefit, even if longer term prosperity was being jeopardized.

The China Factor

Between 2000 and 2015, foreign holdings of US securities (the bulk being government bonds) grew at 11% annually—from $3.6 trillion to $17.1 trillion. The transformation and maturity of the Chinese economy was a main driver behind the surge.

During this time, China’s holdings grew at 22% annually—from $92 billion to more than $1.8 trillion.

However, as China’s growth has moderated and its currency continues to depreciate, additional fiscal measures have taken place to meet economic growth targets. Over the past 15 months, China has spent $1 trillion of its $4 trillion foreign currency reserve stockpile, and in turn, has purchased much less US debt.

In fact, Japan has recently overtaken China as America’s top foreign creditor. Combined, the two nations account for more than 37% of America’s foreign debt holdings.

While still significant, both countries’ purchases have been in decline since peaking in 2013, along with several other key central banks around the world that are now more focused on investing domestically.

A Changing Debt Market

In addition to stemming slow economic growth through government spending, China is also attempting to curb excessive leverage in the debt markets.

“Bank wealth products,” made possible by a plethora of cheap credit, are heavily marketed to Chinese investors as an alternative to low-money market rates. The bond holdings of wealth management products more than doubled over the 18-month period ending in June 2016.

But the products are often sold with little disclosure about the securities responsible for producing income to investors. And the People’s Bank of China began tightening lending standards this past August in response to the risks the products pose to its broader economic agenda.

Combined with expectations for more aggressive tightening of monetary conditions in the US, the $9 trillion Chinese bond market has declined precipitously.

The yield on ten-year Chinese government bonds has risen 30% to 3.4 percent, compared with 2.6 percent less than a month ago. Yields go up when bond prices go down, and a higher yield makes it more expensive to issued debt.

A Declining Currency

The Chinese yuan is also sinking along with bond prices and has posted its biggest annual decline in more than 20 years. Goldman Sachs estimates currency is leaving the country to the tune of $70 billion per month, up from a monthly pace of about $50 billion since mid-year.

As the second largest economy and major supplier of capital to the US, these developments and implications for financial markets should not be overlooked.

If the US plans to continue tapping debt markets to ramp up fiscal spending, it may be met with much more challenging conditions.

It’s not a question of if the money will be available, but at what cost?

The Calm Before the Storm?

At 26X current earnings and 17X forward earnings, the S&P 500 is richly valued.

The Dow Jones Industrial Average is up 13% in 2016, oil has gained 25% since the presidential election. Volatility is at a 52-week low.

The gold and bond markets haven’t been so lucky; investors have experienced sharp losses in recent trading. Bears in both markets are out with a vengeance amid a more hawkish Federal Reserve and optimism for reinvigorated economic growth next year. This is driven in part by promises of added fiscal stimulus, deregulation, and rising interest rates. 

So, while all may be calm in US equity markets this holiday season, we recommend taking into consideration the larger forces at play and rigging for stormy waters in 2017.

Gold has declined close to 20% since post-Brexit highs, and yields are surging to levels last seen in 2014. For those not already positioned, this is a smart time to diversify into precious metals or add to an existing allocation.

When volatility heightens in the coming months, you’ll be prepared no matter where the market lands.

Only time will tell if Trump’s economic plan and policies will come to fruition or if investors will be met by disappointment. But the changing debt market could be a key factor affecting the outcome.

Free Ebook: Investing in Precious Metals 101: How to buy and store physical gold and silver

Download Investing in Precious Metals 101 for everything you need to know before buying gold and silver. Learn how to make asset correlation work for you, how to buy metal (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t. It’s the definitive guide for investors new to the precious metals market. Get it now.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules